Rolls-Royce Holding plc (0.6%) (RR – $8.48/ £5.75 – London Stock Exchange) (LSE:RR)
provides jet engines, power and propulsion systems, and services to commercial aviation, defense, marine, oil, and gas, and other industries. RR has leading engine positions as the sole supplier on the Airbus A350 and reengineered A330 (i.e. A330neo), and one of two suppliers on the Boeing 787 Dreamliner, two new wide body programs with healthy backlogs, to be delivered over the next decade. Engine deliveries lead to recurring, higher margin parts and service revenues, which benefit the company more than twenty years after new engines are delivered. RR’s stock continues to struggle given a recent view on 2016 earnings that calls for further medium-term headwinds, including reduced aftermarket revenue on parked legacy Boeing 777 aircraft, and weak demand in business jet, regional jet, and marine markets. Given current demand trends, the company is taking aggressive cost that includes relocating production, modernizing factories, eliminating manufacturing redundancy, and trimming layers of management. Just as important is the reinvigoration of firm culture and decision-making under new CEO Warren East, with a focus on improving information systems to drive timely and adaptive decision-making. While a meaningful inflection in earnings and cash flow will not occur before the end of the decade, Rolls has a valuable franchise as one of two commercial wide body engine providers, and a new management capable of turning the organization around in the medium term.
From Mario Gabelli
)'s GAMCO Equity Income Fund fourth quarter 2015 commentary. Continue Reading »